California recently enacted Senate Bill 362 (2025 SB 362), to take effect January 1, 2026. SB 362 expands on the state’s commercial financing disclosure law for small business lending found at Financial Code Sections 22800, et seq. and in implementing regulations found at Title 10, Cal. Code of Regulations. For commercial financing offers of $500,000 or less, creditors must re-disclose the proposed APR under certain circumstances, and may not use the terms “rate” or “interest” in a deceptive way.
THE RULES APPLY TO OFFERS MADE FOR COMMERCIAL FINANCING OF $500,000 OR LESS
Parties who have to adhere to these requirements are referred to as “providers”, which consist of:
- a person who extends a specific offer of commercial financing to a recipient.
- a nondepository institution, which enters into a written agreement with a depository institution to arrange for the extension of commercial financing by the depository institution to a recipient via an online lending platform administered by the nondepository institution.
Businesses not covered by SB362 include:
- Depository institutions;
- Lenders regulated under the federal Farm Credit Act (12 U.S.C. Sec. 2001 et seq.);
- A commercial financing transaction secured by real property;
- A commercial financing transaction in which the recipient is a dealer, as defined by
Section 285 of the Vehicle Code, or an affiliate of such a dealer, or a vehicle rental company, or an affiliate of such a company, pursuant to a specific commercial financing offer or commercial open-end credit plan of at least fifty thousand dollars ($50,000), including any commercial loan made pursuant to such a commercial financing transaction; and
- Any person who makes no more than one commercial financing transaction in California in a 12-month period or any person who makes five or fewer commercial financing transactions in California in a 12-month period that are incidental to the business of the person relying upon the exemption.
Because a “recipient” is defined as “a person who is presented a specific commercial financing offer by a provider that is equal to or less than five hundred thousand dollars ($500,000)”, the new law applies only to financing offers of $500,000 or less.
THE TERMS “RATE” AND “INTEREST” SHALL NOT BE USED IN ANY DECEPTIVE MANNER, AND AN APR DISCLOSURE MUST BE REPEATED WHEN AND IF THE PROVIDER DISCLOSES OTHER FINANCING TERMS TO THE RECIPIENT
The specific requirements of SB362 are:
(a) A provider shall not use the term “interest” or “rate” in a deceptive way that could reasonably result in the recipient being misled.
(b) After extending a specific offer to a potential recipient, whenever a provider states a charge, pricing metric, or financing amount to the potential recipient for that specific offer during an application process for commercial financing, the provider shall also state the annual percentage rate of that commercial financing offer by using the term “annual percentage rate” or the acronym “APR.”
In other words, the provider, after initially disclosing the proposed APR, must re-disclose the APR every time the provider states to the recipient a charge, pricing metric or financing amount.
For the prohibition against using the term “rate” or “interest” deceptively, the statute provides non-exclusive descriptions of confusing representations to include:
(1) Describing the price of credit as “simple interest” when referring to a non-annual rate as opposed to a non-compounding annual rate that a reasonable person would understand “simple interest” to mean.
(2) Describing the price of credit as an “interest rate” when describing a daily, weekly, or monthly rate and not an annual rate.
(3) Describing the price of credit as “X% fee rate” or “Y% factor rate,” particularly when those “rates” diverge materially from the APR.
Thus, the provider must be sure it uses “rate” and “interest” in communications about a commercial financing offers in clear and limited fashion.
Unfortunately, the Department of Financial Protection and Innovation has not yet promulgated regulations that provide more clarity as what is a deceptive use of identified terms, so creditors should be cautious in their communications.
ENFORCEMENT
For enforcement purposes, a violation of this new law by a person licensed under the California Financing Law is a violation of the California Financing Law if the violation relates to a commercial financing transaction that is subject to the California Financing Law. Further, a violation of this new law is an unfair, deceptive, or abusive act or practice under the California Consumer Financial Protection Law if the violation relates to a commercial financing transaction that is not subject to the California Financing Law.
